Gilberto Kassab, national president of the PSD, said in an interview with Valor Econômico that how the government handles public accounts will define the party's relationship with Lula in a fourth term. For investors, this marks the first organized call for a fiscal adjustment coming from within the government's potential coalition. And it comes precisely when long-term interest rates and the dollar are elevated out of fear that this adjustment will not materialize.
What Did Kassab Say About PSD's Support for Lula?
According to Valor's report, the PSD wants to retain positions in the federal government and acknowledges that Lula has the mandate to deliver his promised social programs. The price of that support, however, is a commitment to spending cuts. The party will hold 43 federal deputies and four senators starting in February 2027.
The interview introduced a proposal that goes beyond merely making demands. Kassab called the current model of congressional amendments "unacceptable" and argued that all of these funds should instead finance executive branch programs. According to the report, the roughly R$ 60 billion that lawmakers are set to direct next year would be tied directly to the administration's agenda. Regarding leadership in the Chamber of Deputies, he noted that the party's lawmakers have already agreed to support the reelection of Hugo Motta (Republicanos-PB). PSD senators are expected to make their decision in the coming days.
The fiscal demand itself is not new. On October 31, in an interview with O Globo, Kassab stated that fiscal balance measures could yield a "deeper relationship" with the government, according to Poder360. The following day, on Band's Canal Livre program, he urged Lula to appoint an economic team in the mold of Palocci and Meirelles and execute the adjustment without raising taxes. What has changed now is the tone. The demand has shifted from advice to the very condition that will measure the relationship, backed by a concrete proposal regarding amendments. Why does this matter to investors? Because the market has already priced in a hefty premium due to fiscal uncertainty.
Why Is the Market Paying Attention to the PSD Now?
In the first trading session after the runoff election, the market fully priced in the fiscal risk of a new Lula term. The reaction was the largest since the change in the exchange rate regime in 1999:
Future interest rates suffered even more than the foreign exchange market. According to the BBC, contracts maturing in 2031 surged nearly 3 percentage points that day. On Wednesday (4), Copom held the Selic rate at 13.75%, interrupting a sequence of five 0.25-point cuts that began in March, when the rate stood at 15%. The November 3 Focus Bulletin raised the expected Selic rate for the end of 2027 from 11.75% to 12.50%. In short, the market began demanding a risk premium due to uncertainty over whether a fiscal adjustment will actually happen.
This is where the size of the PSD matters. By our math, 43 seats represent about 8.4% of the Chamber of Deputies (43 out of 513). Its real weight becomes apparent when looking at the vote thresholds required for different types of legislation. A standard bill requires 257 votes, and the PSD alone covers nearly 17% of that requirement. A constitutional amendment requires 308 votes, with the party delivering roughly 14%. No major fiscal package can pass without the Chamber's fourth-largest block. But what exactly is Kassab asking for, and what does his statement leave unresolved?
What Kassab Asks For and What His Words Do Not Guarantee
- Spending cuts as an explicit condition for support, coming from a party that wants to remain in government rather than from the opposition.
- An adjustment without tax hikes, as he advocated on Canal Livre, which reduces the risk of shouldering the burden solely through revenue increases.
- Linking congressional amendments to executive programs, giving the administration tighter control over a large slice of the budget.
- No specific figures: the interview does not state how much must be cut, which expenses will be targeted, or the timeline.
- Changes to congressional amendments depend on Congress itself, which currently benefits from the model Kassab criticizes.
- The leadership of the economic policy has not yet been decided: the market awaits the appointment of the next Treasury/Finance Minister for the new term.
To put the scale of these amendments into perspective: the R$ 60 billion cited in the report exceeds the nearly R$ 50 billion cost that a R$ 120 increase in the minimum wage would entail, as we outlined when explaining why raising the minimum wage weighs so heavily on the budget. Earmarking these funds for executive programs does not cut a single real on its own. However, it removes a portion of the budget that is currently decided outside the government, making it easier to plan an adjustment.
The starting point is already tight. Central government accounts closed August with a primary deficit of R$ 13.585 billion, and the campaign signaled moves in the opposite direction of what Kassab is demanding, such as indications that social benefits would be shielded from cuts. There is also a caveat in Kassab's remarks: he accepts the delivery of social programs. Consequently, cuts would have to come from subsidies, privileges, and other expenditures where political resistance is typically fierce. Moving forward, the key question is how your investments will perform under each outcome.
What This Changes for Fixed Income, FIIs, and the Dollar
The statement on its own does not permanently move asset prices. What it does is increase the likelihood that the government will need to demonstrate a credible adjustment to secure a congressional majority. The best benchmark to measure this is the expected Selic rate for 2027, which already prices in fiscal fears. The three scenarios below are based on Focus surveys before and after the election. The third scenario—featuring rising interest rates—is our own, based on a Citi report cited by CNN indicating that the market is already pricing in a potential rate-hike cycle.
The government announces an economic team with autonomy and concrete spending cuts, approved with the backing of the PSD and the political center. The election risk premium fades, and Focus projections return to pre-runoff levels.
Support is negotiated in exchange for cabinet posts while spending cuts remain vague. Current Focus projections stall, and long-term interest rates stay elevated.
The PSD pulls away, the fiscal package fails to materialize, and Copom swaps its rate pause for rate hikes.
In fixed income, investors holding Tesouro IPCA+ or long-term fixed-rate bonds saw bond prices drop as future interest rates spiked. Those buying now lock in higher yields and stand to gain if the first scenario plays out, as falling rates drive up bond prices. Tesouro Selic continues yielding 13.75% annually without this price risk. In brick-and-mortar FIIs (Brazilian REIT-style real estate funds) and shares of leveraged companies, the effect is familiar: high long-term interest rates make the income from these assets less attractive relative to government bonds. Consequently, a credible fiscal signal tends to benefit these assets more than others. In the foreign exchange market, the dollar's rise since the election is driven almost entirely by domestic risk premium—the portion of the price most likely to retreat if a fiscal adjustment is delivered.
What to Watch in the Coming Weeks
Kassab's statements will only translate into actual fiscal adjustments if followed by concrete action. These are the signals indicating which path the country is taking:
The Next Finance Minister: If the appointment goes to someone with autonomy and market credibility, as Kassab himself requests, it will serve as the first sign of the positive scenario. If the appointment is delayed, the risk premium will persist.
The 2027 Selic Rate in the Focus Survey: Any decline below the current 12.50% will indicate that the pressure is working. If it rises, the market is betting on the negative scenario.
The Dollar Relative to R$ 5.40: Consistently trading below the post-election closing level signals relief. Breaching that day's peak of R$ 5.60 would indicate renewed market anxiety.
The Position of PSD Senators and the Fate of Amendments in the 2027 Budget: If the earmarking of the R$ 60 billion for executive programs makes it into the actual budget text, Kassab's proposal will have moved beyond mere rhetoric.
It is also worth monitoring measures moving in the opposite direction, such as the R$ 7 billion fuel package that has already weighed on the primary result. Until year-end, new uncompensated spending is the type of news that keeps long-term interest rates anchored at their current highs, regardless of pressure from the PSD.
Summary: Kassab has turned spending cuts into the governing condition for the PSD's support of Lula while bringing a concrete proposal for congressional amendments. This is welcome news for those hoping for interest rate relief, but for now, it remains mere intent. Prices are unlikely to react on a lasting basis until a new Finance Minister is named and concrete spending cuts with defined values are presented.
